Digital currencies are becoming popular due to the increased number of users opting for it as a form of transaction and investment. Bitcoin is the oldest and most popular cryptocurrency.
The transactions involving digital currencies are not regulated by any regulatory agencies or exchanges. Even though these currencies are converted to fiat currencies through a number of exchanges. The involvement of fiat currencies always brings taxes into the scenario.
Due to the increased popularity of digital currencies, the government had increased the regulations in taxes on cryptocurrency investments. According to the latest guidelines released, cryptocurrencies should be treated as property for calculating taxes.
This is applicable to all the currencies available in the market. This means all the taxes applicable for a property is applicable to all cryptocurrencies. The following events are taxable according to the guidelines:
- Trading of digital currencies to physical currencies.
- Trading cryptocurrency to another cryptocurrency.
- Paying for goods and services using cryptocurrencies.
- Receiving cryptocurrencies as a mode of income.
The following are not taxable events based on IRS guidelines:
- Gifting digital currencies.
- Transfer of cryptocurrencies.
- Buying cryptocurrency using fiat money.
- Donating cryptocurrencies to charity.
For all the transactions involving cryptocurrencies, the taxes for gains and losses should be calculated based on the market value of the currency in US dollars.
Digital currencies are also liable for capital gain taxes. When a cryptocurrency is sold for taking profit, the change in the value of the currency is considered as the gain, and taxes should be paid for this gain.
The capital gain taxes are applicable for both long as well as short term investments. Tax is charged on the difference between the market value of the currency during the transactions.
Mining of cryptocurrency consists of two taxable events:
- The mines coins are considered as income and taxes should be paid for cryptocurrencies received as earnings.
- Taxes are also applicable when trading or selling the mined coins for taking a profit. This involves capital gains and capital gain taxes.
Crypto Loans and Margins
Loans and margins based on cryptocurrencies are also becoming popular today. There are a lot of lending platforms that lend out digital currencies in return to a certain percentage of interest. The currencies obtained in the form of loans are also considered as income earned and taxes are applicable for the same.
Exchanging a cryptocurrency for another is also a tax involved process. When a particular currency is exchanged for others, the difference in value when the first currency is bought and spent is considered as the taxable value.
Thus the government had imposed many taxes in the case of crypto transactions. All the exchanges help the users in filing returns by providing tax reports. Filing to pay taxes on cryptocurrencies may result in legal actions.